Huntsman deal value lies in the debt

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At first glance, Huntsman’s $1.73bn cash and financing settlement with Credit Suisse and Deutsche Bank stemming from its busted $10.6bn planned merger with Hexion Specialty Chemicals appears underwhelming.

Huntsman actually gets just $632m in cash, including $12m for the reimbursement of litigation costs. You’d think in today’s environment, where banks are public enemy number one, the company could have gotten more. It was seeking more than $4bn in damages in a Texas state court.

The rest of the settlement – $1.1bn – is in the form of loans to Huntsman. But cash is cash, and loans you have to pay back (or at least should). Many on Wall Street expected at least $1bn in cash in a settlement.

But at least the financing, in the form of $500m in senior secured 7-year term loans and $600m in 7-year unsecured notes, come on very attractive terms. And that’s where you get additional, tax-efficient value. After all, Huntsman is paying a $145m tax bill on its $632m cash portion, yielding $487m after taxes – but nothing up-front on the loans for the tax man.

The term loans have an interest rate of LIBOR (London interbank offered rate) plus 2.25%, which amounts to about 3% today, while the rate on the notes are pegged at 5.5%.

These days, you can’t find those kind of rates on high-yield corporate debt – if you’re even able to tap the debt markets at all.

Moody’s Investors Service rates Huntsman’s debt at Ba3, the equivalent of a BB- rating at Standard & Poor’s – three notches below investment grade. John Rogers, who heads up the chemical group there, estimates that in today’s environment, the term loans would carry an interest rate of 3-4 or more percentage points higher, and that the notes would have rates of 11-12% or higher.

Using the settlement proceeds to pay off its $295m in 11.625% senior secured notes due 2010, and potentially paying down its $200m in 11.5% senior notes due 2012, Huntsman will bank considerable interest expense savings for years to come.

For example, the annual interest it pays on $295m of its 11.625% debt due 2010 and $200m of its 11.5% due 2012 amounts to about $57m. In comparison, the annual interest on its new $500m term loan at around 3% (3-month LIBOR plus 2.25%) is about $15m – for now.

Shares of Huntsman fell 4 cents to $5.92 on the settlement Tuesday, after being down as low as $5.25. While Wall Street was disappointed about the amount of the settlement, Huntsman’s shares could still offer value, especially with a now safer dividend yield of 6.3%.

Remember, Wall Street also was underwhelmed by Dow Chemical’s merger terms with Rohm and Haas in April before its stock shot up from around $8 to over $15 today.

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